(Reuters) - Discount retailer Dollar General Corp <DG.N> said it was cutting prices on its most popular items such as bread, eggs and milk, intensifying a price war with retail giant Wal-Mart Stores Inc <WMT.N> to win back market share.

Dollar General's shares fell as much as 14 percent on Thursday after the company reported quarterly sales below estimates, blaming aggressive competition, lower food prices and a reduction of food stamp coverage in several U.S. states.

Dollar Tree's Chief Financial officer Kevin Wampler downplayed any impact from competition. "I can't tell you (competition) is an issue anymore for us than it usually is."

Retailers are also grappling with a drop in grocery prices that has pressured margins in the second quarter .

Dollar General said prices for milk were down about 8 percent and for eggs over 50 percent.

'SNAP' CUTS HURT

Some states changed in April the criteria for the Supplemental Nutrition Assistance Program (SNAP), formerly known as food stamp program, as they brought back a three-month limit on benefits for unemployed adults.

More than 500,000 people are estimated to lose SNAP benefits this year, according to research group Center on Budget and Policy Priorities.

Dollar General said the changes in SNAP along with grocery deflation reduced same-store sales by 60-70 basis points in the second quarter ended July 29 and were expected to hurt results in the second half of the year as well.

Though Dollar Tree said the impact from changes to food stamps was small, the company's acquisition of larger rival Family Dollar last year has increased its exposure to the program.

Dollar Tree, which traditionally caters to middle-income consumers, attributed the "challenging retail environment" to consumers being pressured by higher rent and healthcare costs.